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Analysis of Long-term Free Agent Contracts

The excitement that accompanies long-term free agent contracts (8-10 years in length) is followed almost immediately by immense scrutiny. These lengthy deals that buyout at least eight years of free agency are associated with significant risk, and it is usually assumed that the player will provide very little value in the last few years of the contract. Despite the high chance that the team will have a devastating amount of money allocated to an unproductive player, we are seeing more and more players signed to these long contracts. While I have mentioned that I consider these long-term free agent contracts to last a minimum of 8 years, they do not need to be signed on the free agent market. Rather, these deals can be extensions signed prior to free agency, but they must buyout at least 8 years of the player’s free agency. This would not include a player like Freddie Freeman, who signed an 8-year contract after 3 seasons in the Big Leagues, which means his contract only buys out 5 years of free agency. I make this distinction because these early career extensions are usually less money and also a different type of risk, as you pay for less of a known quantity.

What is making teams increasingly willing to pay tens of millions of dollars a year for more than 8 years of free agency? For starters, the clubs must guarantee something in the neighborhood of 8 years to secure a superstar talent in free agency these days. With the amount of money in the game continuing to grow, it reasons that clubs expect this growth to continue and make their payments in the last few years of the deal less substantial in regards to their total payroll. Beyond why these deals are becoming more common, we need to know how completed contracts turned out and the current outlook for ongoing contracts. This is important because it does not appear these long-term deals are going away, actually, we are likely to see more in the very near future with players like Jason Heyward and Ian Desmond set to hit the open market following the 2015 season.

Teams looking for one major addition to push them over the top for the next few seasons are more likely to justify a deal like this as a way to win in the short term, while not entirely ruining their future. After all, the player should provide at least 5-6 years of value before they are not a key contributor for the club, and in some cases even more. This gives the team enough time to develop young talent to arrive just as the star becomes extremely overpaid, so they can remain competitive. However, this is rarely what happens, as teams choose to kick the can further down the road and remain in win-now mode, which is not a bad strategy when you win, but what about when you lose?

The Angels can attest that it puts incredible strain on the farm system without improving the Major League roster enough to reach the Postseason. While they finally made it to the Playoffs in 2014 with the best record in baseball, they accomplished this feat two years after they planned. Despite significant free agent expenditures for Albert Pujols (2012) and Josh Hamilton (2013), the Angels did not make it beyond the regular season until 2014. Baseball Prospectus ranked the Angels’ farm system as the weakest of all clubs for the second straight season heading into 2014. Sacrificing draft picks for star free agents and trading top prospects for Major League improvements failed to help the Angels’ efforts in 2012 and 2013, although it helped them for 2014, they have paid a steep price. Where Pujols should have been the star to anchor the Angels roster, he led to the need for more additions, further delaying the rebuilding of their farm system. This is not to say anything negative about the Angels, more to point out that these deals do not guarantee the club’s success, nor does it guarantee the player will remain a star even in the early years of the deal. The Angels are not the only team that has signed a player to a long-term contract and not immediately experienced success, but each team with such a contract was in win-now mode or nearing such a phase.

Another driving force behind these deals is the record amount of money flowing into the game. While many people would like to believe baseball’s popularity is fading, that just is not true. Revenues have been growing for some time, and in 2014, Major League Baseball saw a 13% increase giving them over $9 Billion in revenue for 2014. MLB’s new television deal with ESPN has led to each MLB team receiving over $25 Million per year, which is a $15 Million increase. This is money that MLB gives to every MLB team, but many teams are now receiving much more money from their own local television deals. This influx of cash has led to more spending in free agency, as teams have more money to spend now and also greater security moving forward. With teams like the Angels taking in over $150 Million per year from these deals, it is no surprise clubs are willing to guarantee long-term deals in order to land a superstar for the remainder of his prime. This is especially the case since inflation will likely make the payments in the later years of the deal less significant than they currently seem. Inflation will not make these deals bargains, but it certainly mitigates some of the risk associated with these types of deals, especially if the club expects increased revenue moving forward.

Successful: Among these 7 contracts, three can be considered clear successes for the team. These three are Derek Jeter’s 10-year, $189 Million pact, Scott Rolen’s 8-year, $90 Million contract and Alex Rodriguez’s 10-year, $252 Million deal. During the 9 years that Jeter would have been a free agent without his deal, he accumulated 46.2 fWAR, which comes out to $3.8M/Win. While this shows his deal was certainly successful when considered in its entirety, Jeter also never faded, always being a worthwhile investment. Scott Rolen’s 8-year deal proved to be even more valuable for the team, as his 35.3 WAR over the course of the contract, coming out to $2.5M/Win. Similar to Jeter, Rolen was a valuable player throughout the life of his deal. Finally, Alex Rodriguez’s first 10-year contract was also a very valuable signing for the team. While he opted out after only 7 years, we can still see how he performed in the three years following his opt out. If he had played the entirety of his deal, Rodriguez would have been worth $3.6M/Win and he also never faded during this time.

Even: Of the 7 concluded contracts, Manny Ramirez’s 8-year, $160 Million deal and Todd Helton’s 9-year, $141.5 Million deal were relatively fair for both the player and team. Both contracts ended with the player averaging $4.8M/Win, which is just about what a win was worth in 2008, according to Dave Cameron. Ramirez’s value faded slightly towards the end of his deal, as his defense deteriorated, but he did finish strong in 2008. Helton also lost some value, as he was about replacement level in 2 of his last 4 seasons, but did rebound each time, so he was not a complete waste of resources at any point.

Unsuccessful: The final two concluded deals have not been so team-friendly. Alfonso Soriano’s 8-year, $136 Million contract and Ken Griffey Jr.’s 9-year, $116.5 Million contract never lived up to the hype associated with such long-term deals. Soriano accumulated 19.6 WAR over the course of the deal, worth $6.9M/WAR, and was eventually released during his final season, as he struggled mightily to a 64 wRC+ through his first 67 games in 2014. Ken Griffey Jr.’s deal is about the worst-case scenario for how these deals can play out. Over the life of his contract, Griffey Jr. accumulated just 9.7 WAR, meaning each win cost more than $12 Million. However, even though his WAR was not impressive, he still carried a 118 wRC+, which may not merit such a significant deal, but he did provide offensive value throughout his deal.

Now let us look at how the ongoing contracts look moving forward. However, with the recent increase in popularity of these deals, many of them are far too early in the contract to make any meaningful conclusions. With that in mind, I will not classify 8 of these ongoing deals because they have not gone beyond two seasons, which is not enough time to gauge the deal’s progress. That leaves us with 6 deals that we can draw some conclusions from:

Successful: Only one of these 6 contracts can be considered a clear success. Tulowitzki’s 10-year, $157.8 Million deal from 2011 through 2020 bought out two non-free agent seasons of 2011 and 2012, so for this exercise, it is an 8-year, $144.1 Million deal beginning in 2013. While Tulowitzki has been hindered by injuries in the two seasons of this deal, he has still accumulated an amazing 10.5 WAR and he still looks to be in his prime. His deal expires around age 36, which means Tulowitzki should be a good bet to finish out this deal while still providing value in the final years. Even if he fades heavily at the end of the deal, he should make the overall investment worthwhile, as he only needs to be worth about 10 more WAR over the final 6 years of his extension in order to be worth about $7M/Win, which is right around market value.

Unsuccessful: I would deem the remaining five deals as unsuccessful or at least certainly looking like they will be by the time they expire. Unfortunately, Alex Rodriguez’s second 10-year deal did not go as smoothly as the first. Forgetting about his off-field issues, Rodriguez has still struggled to live up to his $275 Million contract, providing only one season of a WAR above 4, and only 4 seasons as an above average player. Albert Pujols’s 10-year, $240 Million deal may be even worse, as he has never resembled even the worst form he displayed as a Cardinal. This deal will be very ugly by the end of it. Prince Fielder’s 9-year, $214 Million contract has also gone poorly through its first 3 seasons and is likely to remain a rather poor contract, as he was always expected to age poorly, but now his early performance has not provided the value expected to make that worthwhile. Not quite as poor a deal as those above, but Mark Teixeira’s 8-year, $180 Million deal is not looking very good, as he has collapsed after 4 seasons that were about what you would expect from him. However, he no longer shows signs of the player he once was and the final two years of this deal are likely to be as ugly as the two preceding years, when he combined for 0.6 WAR. The final long-term deal that has not worked out so well for the signing team is Joe Mauer’s 8-year, $184 Million contract. He has the best chance of these 5 players to make his deal at least a fair deal, but his shift from catcher to first base will make that quite the challenge. Mauer’s hit tool is not as impressive at a position that is flush with offensive threats, especially since he does not provide the power typical of a first baseman. With 4 years left on his deal, Mauer should be able to maintain his above-average hitting ability, so he will still provide value, but just not as much as was expected when he signed the deal as a catcher.

It is apparent that these long-term deals carry substantial risk and usually result in a winner and loser, but we already knew that. What these deals do show, however, is that it is not a guarantee that these deals always end poorly for the signing club. If the team is on the right spot on the win curve when they sign the player, then it is likely to make the struggles at the end more bearable, but only if he performs well early in the deal. One thing we can draw from this is that the best deals were those that ended around age 36, but those deals that lasted beyond age 38 were ill advised. Clearly this has to do with players fading less at age 36 than 38, but more importantly those deals expiring before age 38 also bought out better early years from the players. This is because the players are still likely in their primes at the beginning of the contract; however, if the deal extends beyond age 38, the player is likely leaving their prime at the time the contract begins.

With this in mind, I would not suggest signing any players to long-term contracts if they enter free agency at or after age 31. This is partly due to the fact that such a deal would then run into the dangerous age of 39 or later, but also because these players are typically exiting their prime, so they will not provide the value in the early part of the deal to justify paying heavily for little to no production at the end of the contract. These deals can only work if the player plays like a star early on in the deal, as is expected, so it is imperative that the team signs him when he is still in his prime. Another significant criteria for a deal is that the team is prepared to win during the early years of the deal, otherwise, such a deal can hinder a rebuild and actually be a waste of resources, even if the player is productive. We have seen this with Troy Tulowitzki’s deal, while it has been worthwhile by his performance, the club has not been competitive for some time and may now be willing to trade him, despite the immense value his deal has. If these criteria are met, then such a long-term contract is a sensible investment, as the benefits outweigh the risks. However, in order to have a winning team in the future, even with so much money going to a somewhat unproductive player, the club must build its farm system during the early and middle years of the deal in order to have cost-controlled talent on the field, since they may have limited funds.

One thought on “Analysis of Long-term Free Agent Contracts”

Hmm, interesting analysis, although the ending points are rather obvious.

I would like to point out that if the Cardinals eventually exercise the option in Matt Holliday’s contract for the 2017 season (which could go either way at this point), that would make it an 8 year contract that will very likely wind up as a very successful deal.